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On Aug. 17, 2018, the Internal Revenue Service (IRS) announced a decision that allows an employer to offer a student loan repayment benefit as an element of its retirement plan — a change that could help clear the way for other employers to offer similar benefits.
As noted in my recent blog about student loan debt and 401(k) plans, a few plan sponsors have already initiated plan features providing that employees who do not make elective (i.e., salary deferral) contributions to the plan but who regularly pay down student debt may be eligible for employer contributions made to the plan on their behalf. The latest IRS decision (in the form of a private letter ruling which does not officially set precedent for other employers) may allay concerns from employers who are interested in offering a tax-free student loan benefit through their 401(k) programs, but are worried about complying with the law.
Private letter rulings (PLRs) are issued to individual taxpayers based on specific sets of facts presented by the taxpayer and can only be relied on by the taxpayer who requested the PLR. These rulings are helpful to others, however, in assessing how the IRS position on the statute and regulations might apply in certain circumstances.
The PLR follows increasing concern that employees (particularly younger ones) with considerable student loan debt cannot afford to contribute to their 401(k) plans, and therefore may be foregoing their employers’ matching contributions.
Under the program described in the PLR, the employer would make a 401(k) contribution on a worker’s behalf if the worker was making a student loan payment of at least 2% of their salary for a given pay period. The employer contribution would be made regardless of an employee’s contribution to a 401(k).
In effect, the letter permits the employer sponsor to address those workers who may be paying down student debt in lieu of saving for retirement. Employees enrolled in the program would still be permitted to make elective contributions to the plan, but they would not receive matching contributions on those contributions.
Other employers who want to offer student loan aid connected with a 401(k) might choose to structure their plan differently, but the PLR clarifies that there is a path to provide a tax-free student loan repayment option through a 401(k) contribution, according to attorney Jeffrey Holdvogt, a partner with McDermott Will & Emery. He said the ruling confirmed that under certain circumstances, employers may be able to link the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan.
While a growing number of employers have added student loan perks to their benefits package, only 4% of employers currently offer their employees some form of assistance or incentive to repay student loans, according to the Society for Human Resource Management.
The IRS ruling may prompt more companies to follow suit.
Industry trade organizations such as the ERISA Industry Committee and the American Benefits Council have already asked the IRS to issue guidance allowing all 401(k) plans to implement a benefit similar to the one described in the PLR.
We’ll keep you posted on the latest developments surrounding this ruling.
Bloomberg, “IRS clears path for student loan repayment tied to 401(k),” Madison Alder, Aug. 20, 2018
Employee Benefit News, “IRS clears way for student loan benefit tied to 401(k),” Kathryn Mayer, Aug. 20, 2018
BenefitsPRO, “IRS opens door for 401(k) sponsors to address student loan debt,” Nick Thornton, Aug. 22, 2018
Investment Company Institute, “IRS approves 401(k) arrangement allowing employer to contribute ‘match’ based on student loan repayments,” Shannon Salinas, Aug. 24, 2018
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This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
Senior Analyst Retirement Research, Invesco Consulting
Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.
Prior to joining Invesco in 2008, Mr. Vogler spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.
Mr. Vogler earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He earned a BA degree in history from Rutgers, The State University of New Jersey.